How Financial Management Affects Institutional Investors’ Portfolio Choices: Evidence from Insurers

Shan Ge and Michael Weisbach
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Shan Ge: New York University, Stern School of Business

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Many institutional investors depend on the returns they generate to fund their operations and liabilities. How does these investors’ demand for capital affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather-related events. We find that insurers with more financial flexibility have larger portfolio weights on riskier and more illiquid assets, and have higher realized returns. Among corporate bonds, for which we can control for regulatory treatment, we find that more financially flexible insurers have larger portfolio weights on riskier and more illiquid corporate bonds. Following losses, P&C insurers decrease allocations to riskier corporate bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for P&C losses with weather shocks. The change in allocations following losses is larger for more financially constrained insurers and during the financial crisis, suggesting that the shift toward less risky securities is driven by concerns about financial flexibility. The results highlight the importance of financial flexibility to fund operations in institutional investors’ portfolio decisions.

JEL-codes: G11 G22 G23 G31 G32 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-6

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